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A person who hears Republicans and Democrats describe each other's budgets
could be forgiven for thinking the plans are as far apart as possible.

Republicans say getting the budget back into balance by 2023 is necessary to
help get the economy on track. Democrats say the cuts needed to do that would
hurt the economy and argue instead for stabilizing the annual deficit and the
resulting debt in proportion to the size of the economy.

But not that many years ago--and seemingly forgotten in the current
debate--Republicans said the deficits during the George W. Bush administration
were sustainable and in proportion to the size of the economy, while Democrats
criticized Republicans and Bush for not reducing the deficit more quickly.

The seeming switch in deficit hawkishness between the parties begs the
question: have times changed or have only the political winds shifted, with the
stances reflecting the difference in control of the White House?

Forty-Year Average of Deficits

In July 2006, the Bush administration released its mid-session review,
projecting a deficit of $296 billion, or 2.3 percent of gross domestic product,
for fiscal 2006. That was less than a prior forecast of $423 billion, or 3.2
percent of GDP, made in February. The Bush administration called the new
deficit-to-GDP ratio figure “significantly lower” and a sign of progress.

“The deficit-to-GDP ratio measures the size of the deficit in relation to the
economy as a whole and permits meaningful comparisons of deficits over time. The
2.3 percent deficit-to-GDP ratio would be the lowest ratio since 2002 and in
line with the 40-year average of 2.3 percent,” the Bush Office of Management and
Budget said at the time. (The deficit-to-GDP ratio in fiscal year 2012 was 7.0
percent.)

Then-House Majority Leader John Boehner (R-Ohio) said in a statement,
“Today's announcement is another clear signal that Republicans are making real
progress on behalf of American taxpayers to reduce and eventually eliminate our
deficit. The fact is, keeping taxes low--coupled with fiscal discipline and
strong economic growth--is an effective blueprint for reducing and eliminating
the deficit,” that also noted the deficit-to-GDP measure as being “equal to the
historical average.”

Rep. Paul Ryan (R-Wis.), who had yet to be named as the lead Republican on
the House Budget Committee he now chairs, also issued a statement at the time,
saying the new data showed “that tax relief paired with spending controls can
put our fiscal house in order and eliminate the deficit.” In it, he also
mentioned the deficit-to-GDP ratio as being equal to the 40-year average.

'Favorable Set of Policies’

Only two months earlier, in May 2006, the House had passed a budget
resolution written by then-Budget Committee Chairman Jim Nussle, an Iowa
Republican. The outline called for reducing the deficit from 2.5 percent of GDP
in fiscal 2007 to 1.0 percent of GDP in FY 2011. “The underlying policies of the
budget resolution--including sustained tax relief, restrained spending growth,
declining deficits, and a stable or falling debt-to-GDP ratio--represent a
favorable set of policies for the performance of the economy,” the budget
said.

“Chairman Nussle deserves great credit for putting together a
fiscally-responsible plan that holds the line on spending and highlights common
sense reforms to make programs more effective. We successfully worked with
conservatives, moderates, and appropriators alike to come together as a team and
pass a responsible budget that controls spending,” Boehner said in a
statement.

On the other side of the aisle, some Democrats were far more deficit hawkish
then than now. The then-incoming chairman of the Senate Budget Committee, Kent
Conrad (D-N.D.), said Dec. 1, 2006, that the description of a deficit-to-GDP
ratio of 2.0 percent as sustainable was “irresponsible.” The description
originated with the then-acting director of the Congressional Budget Office,
Donald Marron, who now serves as the director of the nonpartisan Tax Policy
Center.

“He said in open testimony that our current deficit [and] debt situation is
sustainable. I think that's an irresponsible statement. I could not feel any
more strongly than I do that that is exactly the wrong thing to be telling the
American people,” Conrad said.

But seven years later, the positions seem implacably reversed. The
centerpiece of the House Republican budget (H. Con. Res. 25) is its claim to
balance in 2023 through a spending cuts-only approach (56 DER G-2, 3/22/13). The
Democratic plan from the Senate (S. Con. Res. 8) does not balance in the 10-year
budget window and sees a deficit of $566 billion, or about 2.2 percent of GDP in
2023, with debt-to-GDP stable at around 70 percent (57 DER G-7, 3/25/13). The
Ryan plan would put publicly-held debt on a downward trajectory by 2023, falling
to 54.8 percent in the final year.

The debt-to-GDP figure is closely related to the annual deficit-to-GDP ratio,
representing the accumulation of past deficits in comparison to the size of the
overall economy. Deficits above the annual rate of growth in the economy also
increase the amount of debt as a percentage of GDP.

Lack of Flexibility Seen

Mike Moran, chief economist with Daiwa Capital Markets America Inc., said
Democrats are, in part, correct to look at the debt-to-GDP measure instead of
balance, but said Republicans correctly have a more ambitious goal for cutting
the debt.

“Both are playing politics,” he told BNA April 1, and both Democratic and
Republican plans would leave the debt-to-GDP measure too high in his opinion.
“These are not realistic alternatives.”

Moran instead focused on what he said was a dangerous lack of flexibility
brought about by high debt-to-GDP levels. The level of debt held by
investors--as opposed to the debt owed to the government in federal trust
funds--had sunk to a low of 32.5 percent of GDP in 2001, after four years of
annual surpluses. In 2007, just before the financial crisis hit, it had edged up
to 36.3 percent of GDP. In 2008, it rose to 40.5 percent of GDP and in 2012 it
was 72.5 percent.

Moran said another financial shock or economic slowdown could mean increased
borrowing that would make investors think twice about lending the United States
money. “You need to get back to pre-crisis levels” of debt-to-GDP, he said, to
regain the flexibility needed to react should the economy undergo another major
shock.

Skeptics point to historically low interest rates being paid by the U.S.
government to sell its debt as evidence that the debt level is still manageable.
“Just because interest rates are low doesn't mean high levels won't be
destructive in the long run,” Moran said, citing efforts by the Federal Reserve
to keep rates low and the weakness in the euro making the U.S. dollar more
attractive internationally.

“These situations could easily change in the future,” he said.

While spokesmen for Boehner and Ryan did not answer repeated queries
regarding the change in stance, House Budget Committee Chairman Ryan said March
12 that one of the benefits of balancing the budget is its effect on the
debt.

“Getting the debt to stabilize in this high-debt era does not fix our
problems because the debt's already too large,” Ryan said. “The problem is the
current high levels of debt we have today are a threat to our economy, and they
guarantee that we will destroy the future for the next generation.”

Perpetual Rollover Possible

A more benign view of debt was put forward in 1995, in a paper for the
National Bureau of Economic Research (NBER), by Johns Hopkins University
economist Laurence Ball; Douglas Elmendorf, now the director of the CBO; and
Greg Mankiw, who headed the White House's Council of Economic Advisers during
the George W. Bush administration.

In the paper, the authors argue that a government could, in theory, be able
to perpetually roll over its past debt by issuing new debt as long as the
long-run rate of economic growth outpaced the interest rates paid on the debt.
Essentially, they wrote, the government can run what effectively would amount to
a “Ponzi gamble.”

“The government can most likely run a successful Ponzi gamble by deficit
spending for a while without ever raising taxes to repay the debt and
accumulated interest. It would be wrong to conclude that such a Ponzi gamble is
desirable, ex ante, for it is not certain to succeed. Yet it does succeed with a
high probability. And when it succeeds, it can raise welfare for all
generations,” the trio wrote.

The paper said conventional deficit views see debt as akin to termites, with
substantial and inevitable harm if left untreated for long periods of time.

“Our analysis in this paper suggests that a different metaphor is more
appropriate. Government budget deficits are more like a homeowner's decision not
to buy fire insurance. The policy is not advisable, because the adverse effects
can be large, but these adverse effects occur with a low probability. Indeed the
result of the policy will be a higher living standard as long as the adverse
outcomes do not happen to occur,” Ball, Elmendorf and Mankiw wrote.

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